Tax returns for 2016/17, Tax avoidance schemes, Off-plan purchases

We have some shocking news about tax computations for the 2016/17 personal SA tax returns. We also pass on warnings from HMRC about two tax avoidance schemes which are circulating. Finally, we present some timely tips for advising clients who have bought properties off-plan.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Off-plan purchases

When a taxpayer purchases a newly constructed property, he may put down a deposit to reserve the property before it is finished, or even started. This is referred to as buying “off-plan”.

The contract to purchase the property is normally not completed until the property is finished, and at that time the balance of the purchase price must be paid. If the taxpayer can’t pay the balance when requested, he loses the right to complete the contract and acquire the property.

This is what happened to Mr Hardy, who paid a deposit of £72,000 for an apartment in central London, but due to cash-flow problems could not raise the balance of the purchase price when required. He claimed that his lost deposit was a capital loss.

The First-Tier and the Upper-Tier tax tribunals disagreed. Hardy did not acquire an asset when he paid his deposit, and neither did he acquire a contractual right as the contract did not permit him to assign his right to buy the property. His real loss was thus a tax nothing.

However, HMRC do have their cake and eat it on this issue when the taxpayer is a non-resident buying a residential property. In that case, if the taxpayer does dispose of his right to buy the property off-plan, that disposal is subject to non-resident CGT. Also, the start date for any apportionment of a residential period starts from the acquisition of the off-plan right, not from the completion of the property.

Our CGT experts can help with this tricky area.

CGT on overseas properties, Paying PAYE, NMW traps

As you finalise the last of the SA tax returns for 2015/16, pay close attention to any capital gains relating to overseas property. The correct computation of such gains is not obvious, as we explain below. We also have tips for paying PAYE, and a warning for employers concerning the next scheduled increase in the national minimum wage.

What follows is an extract from last week’s tax tips email for general practitioner accountants – see side box for more info.

CGT on overseas properties

Calculating the CGT due on the disposal of a property is not easy; you need to know which expenses can be deducted, and if any tax reliefs are due. If the property was located overseas, the computation is complicated by the fact that the consideration, and possibly the purchase, are likely to have been made in a foreign currency.

If your client has sold an overseas property you should check that the gain has been calculated in line with HMRC guidance and case law, as any deviation from the approved method will leave the taxpayer open to penalties for errors.

Mr & Mrs Knight calculated the gain on the disposal of their property in Switzerland in Swiss francs, and translated the resulting gain into sterling at the exchange rate applicable on the date of disposal. This appeared logical, as they purchased the property in 1988 in Swiss francs, and sold it in 2010 for consideration received in Swiss francs.

However, it was established in Capcount Trading v Evans [1993], that the correct way to calculate such a gain is to translate each item in the computation into sterling at the date the transaction occurred. For the Knights this meant restating the purchase price in sterling using the appropriate exchange rate in 1988, and restating the consideration in sterling at the date of disposal in 2010. The difference between those figures, less any allowable expenses (also expressed in sterling), is the assessable gain for UK tax purposes.

This method of calculation pulls in any part of the gain which is solely related to the movement in the exchange rates, and makes that exchange-gain also subject to CGT. This may appear unfair, but that is how the computation must be done.

Whenever a client disposes of an overseas property, you also should check that any income received from letting the property has been correctly declared on their earlier tax returns. This is the first question HMRC will ask when they see the gain from the property disposal reported.

CGT horror, VAT on overseas expenses, Contracts for difference

To coincide with Halloween, when frightening and spooky things abound, we have three tales of tax horror to shock you. First: bad advice given by a solicitor on the gift of a house. Second: the lack of advice given by a large firm of accountants on reclaiming VAT on overseas expenses. Finally a warning about letters from HMRC concerning schemes involving contracts for difference. There is something to learn from each of these situations.

This is an
extract from our topical tax tips newsletter dated 29 October 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

CGT horror 
Imagine this: your client tells you he has given his daughter a let property to reduce the value of his estate for IHT purposes, and to provide his daughter with a source of income. The solicitor who handled the conveyance said as no money changed hands there was no capital gains tax to pay. 
The solicitor’s advice is wrong on two fundamental points. The gift between the father and daughter is taxable, as it doesn’t fall into one of specific exemptions provided by the legislation – such as a transfer between spouses/civil partners (TCGA 1992, s 58). 
Where a transaction – including a gift – occurs between connected parties, the transaction is deemed to occur at the open market value of the asset transferred (TCGA 1992, s 17). The father and daughter are connected persons as they are relatives (TCGA 1992, s 286(2)). It makes no difference that the daughter is an adult, she remains connected to her father for the whole of her life. The fact that no money changed hands doesn’t change the deemed consideration for the transaction. 
If the property has increased in value while your client has owned it there may well be CGT to pay. The taxable gain is calculated as if he had sold the property to his daughter at its market value. 
There are two possible ways to mitigate this gain:…..

full newsletter contained the remainder of this piece plus links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.

CGT for non-residents, RTI error – whose fault is it?, Employment Allowance

What Numpty invented a new form of CGT that requires the gain and tax due to be reported within 30 days? We explain what your clients need to know about this new tax. We also look at the latest position regarding RTI errors and penalties. Finally we have an update on the employment allowance.

CGT for non-residents 
A new capital gains tax charge came into force on 6 April 2015: non-resident CGT (NR CGT). This could impact a range of clients including; property developers, conveyancing solicitors, as well as non-resident owners of UK residential property. 
The NR CGT applies to gains made on the disposal of residential property in the UK by owners who are not resident for tax purposes in the UK. The new tax is restricted to gains that relate to the period from 6 April 2015 to disposal date, so it is unlikely to be payable on property sales made early in 2015/16. 
However, the NR CGT reporting regime requires a NR CGT return to be made to HMRC within 30 days of the conveyance of the property. This applies whether there is any NR CGT to pay or not, where there is a loss on the disposal, and even where the taxpayer is due to report the disposal on their own personal or corporate self-assessment tax return or under the ATED regime. 
A non-resident vendor who completes a residential property sale on say 1 May 2015 must complete the online NR-CGT return (you can do this on their behalf) by 31 May 2015. The non-resident vendor can be an individual, partner in a partnership, trustee, personal representative of non-resident who has died, a closely-held company or a fund. 
Where the vendor is not registered for UK income tax, corporation tax or ATED, the NR-CGT charge must be paid with 30 days of the conveyance date. This payment can only be made once the NR-CGT return has been submitted and HMRC have replied with a reference number to use when making the payment. There are penalties for failing to file the NR CGT return on time, and failing to pay the tax on time. 
If the taxpayer is registered for UK tax they can opt to pay the NR CGT due at the same time as the tax due for their normal self-assessment, so by 31 January 2017 for gains realised by individuals/ trustees/ PRs in 2015/16. 
Conveyancing solicitors need to be aware of these new very tight reporting and payment deadlines. Property developers need to warn their non-resident customers that they will be liable to tax on any gain made when they sell the property and that gain includes any discount in the price achieved by buying “off-plan”. 

This is an
extract from our tax tips newsletter dated 29 April 2015. The newsletter
itself contained links to related source material for this story and the
other two topical, timely and commercial tax tips. It’s clearly written
and extremely good value for accountants in general practice. Try it
for free by registering here>>>

Minimising CGT, HICBC strategies, PAYE codes for 2015/16

Now that January is over it’s a good time to think about tax planning and benefit protection strategies for your clients. Those who are looking to sell their business need to plan to minimise CGT, and there is a new way to do this using EIS. Clients with young children want to protect their child benefit so need advice on how to keep their net income below the relevant thresholds for 2014/15. Finally we review the new features to watch out for in the 2015/16 PAYE codes.

Minimising CGT
Until recently individuals who wanted to minimise their exposure to CGT on the sale of a business had to choose between paying 10% CGT by claiming entrepreneurs’ relief (ER), or to defer the gain using the Enterprise Investment Scheme (EIS) or the new Social Investment Tax Relief (SITR).
The gain subject to the ER claim can’t be deferred, as it has already been taxed. When the gain is deferred by investing in shares issued under EIS, or shares or debt issued under SITR, no CGT is payable immediately. But that gain becomes subject to CGT when the EIS or SITR investment is disposed of, or when the investment conditions are broken. At that stage it is normally too late to claim ER, and anyway a claim for ER would mean 10% CGT becomes payable retrospectively based on the date of the sale. 
However, for investments in EIS or SITR made on after 3 December 2014 the individual can choose to defer a gain, and then claim ER when that investment is disposed of. Thus your client can defer a gain that qualifies for ER, and then take advantage of the 10% rate of CGT by claiming ER when the deferred gain falls back into charge.
Remember a gain can be deferred by investing in EIS/ SITR up to three years after the date the gain was made, or one year before that date. So even if your client has already made a large gain, it is not too late to use the EIS instead of ER. 
This is also a useful mechanism for splitting a large gain into smaller gains that can be covered by the taxpayer’s annual exemption. The EIS shares can be disposed of in small tranches over a number of years, and at each disposal a relevant proportion of the deferred gain falls back into charge for CGT.
Do talk to one of our CGT experts if you would like further details on how this CGT planning works.

This is an
extract from our tax tips newsletter dated 5 February 2015. The newsletter
itself contained links to related source material for this story and the
other two topical, timely and commercial tax tips. It’s clearly written
and extremely good value for accountants in general practice. Try it
for free by registering here>>>